A Yield-Based Asset Ratio to Boost Minimum Investment Returns

20 Pages Posted: 25 Mar 2024 Last revised: 27 Mar 2024

Date Written: March 3, 2024


Minimum investment returns are of primary importance to funding retirement expenses from a portfolio of volatile assets. Prolonged periods of low yields have at times had severe effects on minimum 20-year returns. Is there a strategy that can mitigate weak medium-term returns more effectively than fixed-percentage stock allocations?

Benjamin Graham allowed for fluctuation in the proportion of a portfolio invested in common stock. Considering his "Margin of Safety" principle for stock purchases and its complement for stock sales, one might adjust the stock percentage of the portfolio based on both the earnings yield of stock and the current yield of bonds, facilitating capital appreciation by avoiding trading until the present yield of the purchased security is substantially greater than that of the sold security. Precautions may be required when stock prices exceed historically sustainable levels.

A simple formula implementing such a "Yield-Based Asset Ratio" hypothetically would have had a minimum real compound annual growth rate (CAGR) of 1.92% for 20-year intervals since 1911 when allocating between 10-year US Treasury bonds and the S&P 500 index, considerably higher than would have been observed for 6%, 60%, and 85% stock allocations (CAGR -2.33%, -0.41%, and 0.09%, respectively). Results suggest that a fixed-percentage stock allocation may not offer the best protection of returns and principal for interval lengths of 11 or more years. Volatile assets pose undue risk to their principal value over the short term.

Keywords: stock earnings yield, bond current yield, margin of safety, Benjamin Graham, stock returns, bond returns, asset allocation

JEL Classification: C15, D14, G11, G14, N21, N22

Suggested Citation

Eschenlauer, Arthur, A Yield-Based Asset Ratio to Boost Minimum Investment Returns (March 3, 2024). Available at SSRN: https://ssrn.com/abstract=4746302 or http://dx.doi.org/10.2139/ssrn.4746302

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